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How To Franchise Your Business
By: Mark Siebert
CEO, The iFranchise Group
Copyright, The iFranchise Group, 2011 All rights reserved
About the iFranchise Group
• More hands-on experience than any other firm – 27 consultants with over 500 years of franchise experience – Our consultants have worked with 98 out of the top 200 franchise
companies worldwide
• More “senior level” experience – Former CEOs, CFOs, and EVPs of major franchise companies – C-Level Experience at 23 franchise companies – Experience with start-up franchise programs, not just established
franchisors
• Services and expertise in four functional areas – Strategic Planning – Quality Control – Marketing – Organizational Development and Training
• Sales Assistance through Franchise Dynamics
• Management Recruiting through Franchise Recruiters
Strategic Planning “Success (or Failure) Does Not Happen By Accident”
If you don’t know where you are going, then any road will take you there. The Adventures of Alice in Wonderland
Strategic Planning The Key to Success
• You are entering a new business
• Goals drive your business. Start with support and cost structure
• What do you need to do to help your franchisees succeed?
• Don’t rely on guesswork: The future of your business is at stake
• Financial analysis is essential
• Reverse engineer your success
Goal Driven Modeling
Goal Sell for $10M in 5 Years
Average Selling Price 6.7 times EBIT
Year Five Earnings $10M/6.7 or about $1.3M
Average Royalties $30,000 per franchise
Average Net Royalties $10,000 per franchise
Need to sell $1.3M/$10,000 = 130 Franchises
Goal Driven Planning
10 15
25
30
50
Year 1 2 3 4 5
Sales Hire Franchise Salespeople
Goal Driven Planning
10 15
25
30
50
Year 1 2 3 4 5
Sales Hire Field Reps
Goal Driven Planning
10 15
25
30
50
Year 1 2 3 4 5
Sales
Hire Support Staff
Goal Driven Planning
10 15
25
30
50
Year 1 2 3 4 5
Sales
Goal Driven Planning
10 15
25
30
50 Personnel
Marketing
Office Space
Year 1 2 3 4 5
Sales
Brochures
Risk of Failure
Speed of Growth
Competitive threat
Franchise Strategy
There is Risk Associated with Both Slow and Fast Growth
Cash Flow Modeling for Growth Aggressive Growth
$
Time
Hire Staff in Anticipation of Need and Advertise Aggressively
Royalty & Gross Margin Revenues
Fixed Costs = Salary + Advertising
Loss
Must rely on one of the following to fund payroll: 1. Adequate initial capitalization 2. Revenues from existing operations 3. Franchise sales (a worst practice)
Why Relying on Franchise Fees is a WORST Practice
$
Time
Royalty & Gross Margin Revenues
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Fixed Cost = Salaries + Advertising
Cash Flow Modeling for Growth Conservative Growth
$
Time
First Hire
Second Hire Royalty & Gross Margin Revenues
Only incremental cost is franchise marketing and that can be a variable cost after a start-up allocation
The Golden Rule: Grow No Faster Than Your Ability To Support Your Franchisees
Leverage Existing Staff and Minimal Advertising
Loss
Establishing Your Structure
Determining the Initial Fee
• Match fee to service performed • Fee determination methods
– Cost plus – Market comparables – Positioning – Financial analysis
• Average fee: $25,000 - $35,000 • Fee should not deter franchise
sales • Initial fee is a minor profit center
Initial Fee Minor Profit Center
Advertising $8,000 - $10,000 Sales commissions $3,000 - $7,000 Brochures & mailing $500 Legal $500 - $1,000 Site selection 0 - $5,000 Training at HQ $2,000 - $5,000 Field training & travel $2,000 - $4,000 Travel $1,000 Initial support $2,000 - $5,000 Totals $17,500 - $38,000
Can Leverage Off of Fixed Costs in Early Years of Franchising
Advertising $8,000 - $10,000 Sales commissions $3,000 - $7,000 Brochures & mailing $500 Legal $500 - $1,000 Site selection 0 - $5,000 Training at HQ $2,000 - $5,000 Field training $2,000 - $4,000 Travel $1,000 Initial support $2,000 - $5,000 Out of Pocket – Early Years $9,000 - $12,500
Royalty Determination
• “Me-too” is not a strategy – it is a recipe for disaster • Need to create win-win • Reverse engineering franchisee ROI • Need for sensitivity analysis
– What if . . . ???? – Look at progressively worse case scenarios
• The 1% rule – The importance of small numbers – How can 1% of $500,000 = $10 million?
Other Major Business Decisions Affecting Profitability
• Structure – Structure dictates support requirements and
responsibilities • Targeted franchisee
– Will dictate support requirements as well • Territory
– 10% mistake be a disaster • Support and Training
– Staffing is your primary expense as a franchisor – Cannot set fees without knowing expenses
Staffing Ratios for the Franchisor
The right staffing ratios for your company will depend on a variety of factors including:
The type of industry in which you operate
The complexity of your unit level operations
The speed at which your system is expanding
The geography over which you’re expanding
The types of franchises you are awarding
Your philosophy toward support
Typical Staffing Ratios
Franchise development staff
Single unit focus = 1 for each 12-25 deals
Multi-unit focus = 1 for each 5-8 deals
Field support staff
Single unit restaurant = 1 for each 20-25 units
Multi-unit restaurant = 1 for each 10-15 owner groups
Territory-based service system = 1 for each 30-35 owner territories
Overall staff to franchised locations (within a mature organization)
1 staff equivalent for each 9 to 11 locations
The Four Pillars Of Quality Control
The Quality Control Myth
• Many people think franchising means lower quality – Fast food reputation – Is McDonald’s “low quality” – Most cannot tell a company-owned from franchise – Consistency is the hallmark of quality
• High end brands are franchised – Ruth’s Chris Steakhouse – Ritz Carlton – Berlitz
The Franchise Trade-Off
• Franchisees can be more difficult to control – Contract vs. “At Will” – Termination more difficult
• Yet franchisees consistently outperform – Higher Caliber – More highly motivated – Longer term
• Studies and anecdotal evidence – 10% - 30% revenue increases – McDonald’s, Sterling Optical, Texaco, and more
Quality Control The Four Pillars of Quality
• Franchisee Selection
• Documentation & Training – the Tools
• Support
• Legal Documents and Compliance
Intelligence
Capitalization
Biggest reason for failure
Can cause franchisees to cut corners
Work Ethic
Personality Experience in leading a team Tendency toward being an entrepreneur Honesty and ethics Philosophy and cultural fit Nature (Confrontational or adaptive) Compatibility (you are “married” for the next 20 years)
“Job Specific” requirements
Five Critical Points of Qualification
The Tools
• A Best Practices Operations Manual comes first • Faster growth requires formal training programs
– For your staff – For franchisees
• Train-the-Trainer too – Franchisee will train their staff – Should have tools to do so
• Video pushes QC to lowest level of organization • On-line training decreases costs, increases quality, and can decrease
liability – Customized by employee – Document what is reviewed and test scores – Lowers on-site training time and costs for both the franchisor and
the franchisee
Real Estate
Pre-Opening Training
Construction
Ongoing Training
Supply Chain
Field Consulting
Brand and Local Marketing
Communications and Technology
Third-Party Supplier Support
Nine Primary Areas of Support
Not relevant to some service businesses
Building Blocks for Supporting Franchisees
Quality Control Comes at a Cost
• Franchisee Selection – Cost of walking away from a check – Higher costs of marketing
• Documentation & Training – First class tools, Intranet, video, etc. – More staff required for more training
• Support – Cost of Staffing – Frequency of visits (travel costs, etc.)
• Legal Documents and Compliance – Enforcement actions – Costs of losing a franchisee (even an
underperformer) If you are willing to pay the price, you can maintain and even improve quality through franchising
Marketing Your Franchise
Marketing Planning A Requisite for Rapid Growth
• Start locally, then regionally – Cluster support – More effective franchise advertising – Consumer advertising economies – Brand building – Buying economies
• Don’t expand faster than your support capability – Quality control is key – Nothing sells franchises as well as happy and successful
franchisees – Three hour drive time
Marketing Materials Essential for Speed
• Franchise marketing is very different from consumer marketing
• Franchise marketing is highly regulated
• Tools: – Your web page should be your
first concern
– Develop a mini-brochure for the sake of economy
– A full-sized brochure is essential for credibility
• Be sure to have your attorney and registration states review all materials
The Franchise Marketing Process
Publicity Print Trade Shows
Direct Contact
Internet Referral
Face-to-Face/Discovery Day
Close
Lead
Close Rate = 1% Median Cost Per Sale = $10,000 Average Cost Per Sale = $13.019 Source: Franchise Update 2010
Brokers
12 weeks
Historical Close Rate = 1% - 2% Median Cost Per Sale = $5,000 Average Cost Per Sale = $8.000
Publicity Print Trade Shows
Direct Mail
Internet Referral
Face-to-Face/Discovery Day
Close
Lead
12 weeks Brokers
Diagnosing Sales and Marketing Problems
High lead costs could indicate
media selection problems
Could indicate Sales problems
-Urgency -Setting Agenda -Closing Skills
Few leads could indicate lack of broker
confidence
Low conversions could indicate
Poor marketing materials
Could Indicate Concept Problems
Low conversions could indicate
poor sales skills or poor validation
In short, close analysis of various media-specific, marketing,
and sales statistics, can be indicative of where
problems may exist, allowing for appropriate corrective action.
Franchise Concept
Itself
Franchise Marketing Materials
Sales Process & Technique
Franchise Lead
Generation
• High unit investment • Financial performance • Look and feel • Franchise structure • Value proposition • Franchisee validation
• Media Selection • Media Mix • Message • Ad Spend • Target Audience • Timing
• Target Audience • Materials Used • Message • Inadequate differentiation • Design Quality • Production Quality
• Lead handling • Follow up • Effective Process • Sales Skills • Salesperson Motivation • Sales Tools • Staffing v. Goals
• Bad/No P.R. • Low unsolicited inquiries • Losing sales to competitors • Repeat objections not overcome • Prospects go dark after validation
• High lead costs • Low close rates • Message confusion • Few qualified prospects • Low quality lead sources predominate
• Bad/No P.R. • Low unsolicited inquiries • Losing sales to competitors • Repeat objections not overcome • Lose sales to market leader • Low application rate
• Low application rate • Low discovery day rate • Low close rate • Long “time to close” • Variances in salesperson close rates • Un- or under-worked leads • Few broker leads
• Evaluate design/construction model • Comparative financial analysis • Evaluate unit economics/ops • Contract comparison • Marketing comparison • Phone interviews of franchisees • Franchisee satisfaction surveys (web) • Evaluate real estate portfolio • Survey “lost” sales
Sales Factor Potential Problems Symptoms Diagnosis
• Historical vs. norms • Media specific analysis • Performance vs. competitors • Message vs. competitors • Franchisee or competitor surveys
• Review for best practices • Message based on surveys • Application rate vs. norms
• Historical vs. norms (close, speed, etc.) • Salesperson vs. salesperson • Historical vs. past performance • Develop sales process map • Mystery shop sales force • Leads per salesman • Sales per salesman • Broker validation calls
Identifying Sales and Marketing Problems
Franchise Concept
Itself
Franchise Marketing Materials
Sales Process & Technique
Franchise Lead
Generation
• Unit investment • Financial performance • Look and feel • Franchise structure • Value proposition • Franchisee validation • Real estate model
• Media Selection • Media Mix • Message • Ad Spend • Target Audience • Timing
• Target Audience • Materials Used • Message • Inadequate differentiation • Design Quality • Production Quality
• Lead handling • Follow up • Effective Process • Sales Skills • Salesperson motivation • Sales Tools • Staffing v. Goals
• Value engineer design and construction process • Suspend sales and work on business model, support, franchisee training • Retain design firm, consumer marketing firm, or PR firm as appropriate • Revise franchise business structure • Provide incremental value or reposition concept • Communications plan, FAC, address survey-specific concerns • Improve real estate process • Develop third-party financing programs
• Develop formal marketing plan based on survey results • Alter marketing mix to focus on higher-quality lead sources • Alter message based on survey results • Increase advertising expenditure based on goals • Optimize website and PPC campaigns • Develop and measure benchmarks; rotate bottom 10% quarterly
• Rewrite, redesign, and reprint materials as appropriate • Develop or revise standard sales correspondence • Rewrite and redesign web pages as appropriate • Add technology improvements (auto-responders, sales software, etc.) • Develop additional promotional tools (video, etc.)
• Develop and map effective sales process • Train sales staff and provide guidelines to non-sales staff • Replace poor sales personnel • Benchmark and measure performance • Alter compensation • Evaluate external resource opportunities (FSO, LQS, software solutions) • Add sales professionals, support staff, or both • Proactive broker programs
Sales Factor Confirmed Problem Potential Solutions
Problem Resolution – Phase Two
Awarding Your Franchise
The Franchise Sale
Unique process unlike any sale – Quit your job – Give up your benefits – Give me your life’s savings – Of course, there are no guarantees – AND I cannot tell you how much you will make
But it is a process – Good Concept – High Quality Marketing Materials & Message – Selecting Appropriate Media – Sales Skills – Advertising Budget
Averages Different strategic approaches Rule one: Be selective
Copyright, The iFranchise Group, 2011. All rights reserved.
Concept
Marketing Plan
Message
Spend
Sales Process
Selectivity
Training
Support
Communication
Validation
The Franchise Sales Cycle
Pre-Sale
Post-Sale
Copyright, The iFranchise Group, 2011. All rights reserved.
Concept
Marketing Plan
Message
Spend
Sales Process
Selectivity
Training
Support
Communication
Validation
How Fast Growth Can Derail The Cycle
Pre-Sale
Post-Sale
Franchise Sales Alternatives
Sell using existing staff – Training is essential – Highly regulated and significant penalties – Often how franchisors get started – Present value of a franchise
Recruit a franchise sales professional – Specialized franchise recruiters – Track record can be a predictor of future success – Beware of the “Order-Taker”
Franchise Sales Outsourcing – Eliminate the need for sales management, admin – Hire pros you might not otherwise afford or attract – Can be expensive – Beware of those that want a piece of your royalty
44
MO 1 MO 2 MO 3 MO 4 MO 5 MO 6 MO 7 MO 8 MO 9 MO 10 MO 11 MO 12
Benchmarking
Initial Planning Session
Strategic Planning
Financial Sensitivity Analysis
Franchise Agreement
Disclosure Document
State Registration Process
Operations Manual
Training Program
Training Videos & LMS Content
Primary Research/Profiling
Franchise Marketing Plan
Develop/Print Brochure
Mini-Brochure
Franchise Sales Video
Web Site Optimization
Franchise Sales Training & Sales
Franchise Implementation Training
Implementation Consulting
Franchise Program for Aggressive Growth Approximate Development Activity Schedule
Strategy Legal Documents Quality Control Franchise Marketing Sales & Implementation
Legal to sell in 36 non-registration states
Legal to sell in all states
Legal Coordination
Conclusion
• Franchising is a means of duplicating success, not creating success
• Success in franchising is predictable when you have a good concept, plan properly, and execute
• Franchising thrives by creating win-win situations – make your franchisee successful and you will succeed
• You must be selective
• Franchising is a new and different business
• Is not the right solution for every business
• Provides one of the most powerful business expansion models ever developed
Questions